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One More Time - CME Group Resubmits Direct Funding Participant Proposal to CFTC

CME Group, for the second time, submitted amendments to its proposed rule changes previously provided to the Commodity Futures Trading Commission in July 2016 authorizing a new category of clearing membership, termed a “Direct Funding Participant.” Under CME Group’s proposal, a DFP could clear all of its own CME Group trades directly with the CME clearinghouse but would not be obligated to contribute to CME Group’s guaranty fund or otherwise be responsible in case of a default by another clearing member. Instead, all of a DFP’s obligations (except for obligations arising from disciplinary actions against a DFP) to CME Group would be guaranteed by at least one other CME Group clearing member – termed a “DFP Guarantor” – that was registered with the CFTC as a futures commission merchant. DFPs would respond to all collateral calls by paying the CME clearinghouse directly, but their performance bond requirements would typically be 104 percent of ordinary amounts. Among other things, CME Group’s latest amendments address clarifications of certain information requested by the Futures Industry Association and membership requirements for DFPs. CME Group anticipates its new rules being effective by no later than October 25. (Click here for background on CME Group’s DFP proposal in the article “CME Group Revises July 2016 Proposal Authorizing End Customers to Become Direct Clearing Members Without Incurring Liability for Default of Other Members” in the April 23, 2017 edition of Bridging the Week.)

Helpful to Getting the Business Done: Prior to CME Group’s initially proposed DFP model, EUREX rolled out its own version of a direct clearing membership called ISA Direct. A big difference between CME Group’s DFP model and ISA Direct is that under ISA Direct a clearing member does not guarantee its client’s performance. However, ISA Direct participation is limited to eligible insurance companies, financial institutions, pension funds and investment funds domiciled in the European Union or Switzerland. (Click here for details regarding ISA Direct in the article “Before There Was CME Group’s Direct Funding Participant Clearing Membership Proposal There Was Eurex’s ISA Direct” in the August 7, 2016 edition of Bridging the Week.) ICE Clear Europe also maintains a program similar to the DFP model known as “Individual Segregation through Sponsored Principal Account.” Under ICE Clear’s Europe’s model, clients of clearing members may elect to become a direct counterparty of the clearinghouse in connection with their transactions. Under this arrangement, a client, known as the “sponsored principal,” maintains a separate account at ICE Clear Europe, as joint tenant with its clearing member broker, known as the “sponsor,” and is jointly liable with its sponsor for all positions in such account. (Click here for background on ICE Clear’s ISSPA model in the article “…And Don’t Forget ICE Clear Europe’s Individual Segregation Through Sponsored Principal Account Offering” in the August 21, 2016 edition of Bridging the Week.)